Greenspan Talks Stock Bubbles

August 31, 2002|By Michael Mckee and Brendan Murray Bloomberg News

Jackson Hole, Wyo. — Federal Reserve Chairman Alan Greenspan said he and his central bank colleagues couldn't have prevented the 1990s stock market bubble because raising interest rates to control share prices might have sent the economy into recession.

"No low-risk, low-cost, incremental monetary tightening exists that can reliably deflate a bubble," Greenspan said in a speech to the Kansas City Federal Reserve Bank's annual economic conference in Jackson Hole.

Greenspan's comments were his most extensive response to critics who have blamed the central bank and its chairman for failing to take action to prevent an unsustainable rise in stock prices, a "bubble," from developing during the decade. And his remarks conflict, in part, with what he has said previously.

The Standard & Poor's 500 stock index rose 233 percent from the beginning of 1999 to its peak of 1,527.46 on March 24, 2000. The economy boomed during the decade and the business cycle of expansion and contraction became less volatile, leading investors to pour ever-increasing amounts of money into stocks in the belief that earnings would keep rising, Greenspan said.

Yet, because business investment in computers and other technology was raising the level of worker productivity in the United States, the Fed couldn't be sure a bubble was developing, he said.

To pop an asset bubble, the Fed would have to change the mindset of investors, he said.